ii view: China challenges weigh at Croda

This speciality chemicals blue-chip is battling subdued market conditions. A buying opportunity?

Full-year results to 31 December 2019

• Revenue down 0.7% to £1.38 billion
• Pre-tax profit down 4.9% to £302 million
• Final dividend up 3.4% to 90p per share

Chief executive Steve Foots said:

"In 2019, we delivered a resilient performance with a strong margin maintained and increased cash flow, despite subdued market conditions. This is testament to Croda's focused strategy and strong business model.

"In the year ahead, subject to trading conditions remaining similar, we expect to make further progress in our consumer markets, whilst demand in industrial markets is expected to remain weak but stable. Our growth will be second half weighted.

"With our new Purpose, Smart Science to Improve LivesTM, we will continue to increase the positive impact our products deliver for our customers and their consumers. We will also reduce the negative impact our activities have on our fragile world. The combination of a healthy innovation pipeline, recent investments, cost saving benefits and a robust business model is expected to underpin performance."

ii round-up:

Speciality chemicals maker Croda International (LSE:CRDA) posted annual sales and profits below City forecasts, hit by both the US-China trade war and changes in Chinese sales laws. 

Revenue for the group’s performance technologies division, which sells coatings to the trade war-hit automotive industry, fell by 7.3% over the year on a currency adjusted basis and by 8.6% in the second half. 

Sales at its personal care division, which makes product ingredients for customers such as Unilever (LSE:ULVR) and Procter & Gamble (NYSE:PG), fell by 3% over the year, hindered by a slower US market and changes in Chinese law aimed at regulating so called Daigou selling. 

Daigou is the practice of Chinese tourists buying cosmetics in Japan or Korea to sell, often on social media sites, back in China. 

Management also warned of potential for some disruption to customer and consumer demand due to the coronavirus. China generates 6% of core business sales and accounts for 2% of group production.

The life sciences division, manufacturing chemicals for both crop care and general health care, had what management described as its “most successful” year ever. Currency adjusted full-year sales rose by 5.9%. 

Croda shares fell by more than 4% in UK morning trading, the biggest faller on the FTSE 100 index and harder hit than sector peers Johnson Matthey (LSE:JMAT), Synthomer (LSE:SYNT) and Elementis (LSE:ELM). 

ii view:

Croda’s track record of 21 consecutive years of increasing the value of its dividend payments is enviable. Special dividends are also on occasion made, although not this year. Its diversity of both business type and geographical location also add to its appeal - 96% of sales and 84% of production are outside the UK. 

But exposure to US-China trade tensions, the struggling automotive industry and broader worries regarding the impact of man-made chemicals on the environment, all generate room for caution. A forecast one-year price/earnings ratio above both the three and 10-year averages and a dividend yield below the 4%-plus average for the FTSE 100 index, suggest that the shares maybe up with events for now. 

Positives: 

• A diverse product and customer base
• A progressive dividend policy 

Negatives:

• Sales hit by US and China trade dispute and new sales legislation in China
• Performance Technologies has exposure to currently challenged automotive markets

The average rating of stock market analysts:

Hold